The Supreme Court should not overturn its 50-year-old precedent that states cannot compel sellers that have no physical presence in the state to collect sales taxes for them, several members of Congress led by House Judiciary Committee Chairman Bob Goodlatte (R., Va.), online sales platforms eBay, Inc., and Etsy, Inc., the Computer & Communications Industry Association, and even the state of Montana, which has no sales tax, urged the court in amicus curiae briefs filed today in a dispute over whether South Dakota can impose such an obligation on remote sellers.
“South Dakota v. Wayfair, Inc., Overstock.com, Inc., and Newegg, Inc.” (case 17-494) comes to the U.S. Supreme Court from the South Dakota Supreme Court, which followed U.S. Supreme Court precedent in a decades-old ruling that states cannot require online retailers and other remote sellers that do not have a physical presence in a state to collect sales taxes on transactions with their residents. The 1992 Supreme Court decision “Quill v. North Dakota” reaffirmed in the context of catalog sales the ruling first articulated in the 1967 decision “National Bellas Hess v. Department of Revenue of Illinois” that sellers can't be forced to collect sales taxes for states in which they have no physical presence.
Previously, in an amicus brief filed in support of petitioners, the Department of Justice urged the court to hold that “Quill” only applies to “traditional mail-order retailers whose only connection to a State is by mail or common carrier” and to either reinterpret or overrule “Quill” and “Bellas Hess” to eliminate the requirement for a physical presence with respect to online vendors. “A physical-presence requirement lacks support in this Court’s broader dormant Commerce Clause jurisprudence, bears no logical relationship to current economic conditions, and imposes intolerable burdens on the States’ ability to collect tax revenue they are lawfully owed,” the department said.
Other parties that filed in support of South Dakota and in favor of overturning the physical-presence requirement included 41 states led by Colorado; retail real estate interests led by the International Council of Shopping Centers; and Sens. Heidi Heitkamp (D., N.D.), Lamar Alexander (R., Tenn.), Dick Durbin (D., Ill.), and Michael Enzi (R., Wyo.).
In addition, in an amicus brief supporting neither side, the National Congress of American Indians and Indian tribes with reservations in South Dakota urged the Supreme Court to “take care” that, however it decides a pending dispute over the authority of states to impose sales taxes on online retailers and other remote sellers, “nothing in its opinion suggests new limits on Tribes’ authority to impose sales taxes or Indians’ immunity from state sales taxes” (TR Daily, March 5).
In a joint brief filed today in support of the online sellers, Chairman Goodlatte, Senate Finance Committee ranking member Ron Wyden (D., Ore.), Sen. Maggie Hassan (D., N.H.), Sen. Jeanne Shaheen (D., N.H.), Sen. Jon Tester (D., Mont.), and Reps. Ron DeSantis (R., Fla.), Anna G. Eshoo (D., Calif.), Jim Jordan (R., Ohio), Ann McLane Kuster (D., N.H.), Zoe Loefgren (D., Calif.), Mark Meadows (R., N.C.), Dana Rohrbacher (R., Calif.), Kurt Schrader (D., Ore.), and Jim Sensenbrenner (R., Wis.) said, “For years, Congress has legislated on the subject of Internet taxes, most recently in 2016 through the permanent Internet Tax Freedom Act (‘ITFA’), and consistently has sided with interests of interstate commerce and against the parochial interests of States and their taxing subdivisions. … Unhappy with their failure to get their way from Congress, the naysayers have reemerged. This case, like others since Bellas Hess, tests the Court’s commitment to the rule of law — not just the particular rule of law announced in Bellas Hess, but to stare decisis, ‘a foundation stone of the rule of law.’”
The lawmakers added, “South Dakota and its amici — including the Solicitor General — all approach this case as if this Court truly was their last resort. It isn’t. Congress is the branch of government constitutionally entrusted to decide whether the physical presence rule of Bellas Hess should stay or go. Congress also is the branch of government best able to measure and weigh the exceptionally difficult policy questions presented by South Dakota’s plea for greater taxing authority.”
The state of Montana said, “If the Court abrogates Quill, small businesses in states that do not impose a sales tax, such as Montana, will face significant burdens, in part because of past reliance on Quill. The sovereignty of the State is also threatened by the due process implications of foreign jurisdictions increasing the reach of their sales-tax authority. Additionally, the State will be adversely affected should this Court abrogate the physical-presence rule without addressing what level of contact is sufficient under both the Commerce and Due Process Clauses.”
Montana added, “Even if an e-commerce retailer is presumed to be able to handle the burden of deciphering rules and collecting sales tax in various jurisdictions once it has a sufficient amount of sales, there is no way to determine whether a retailer has met the threshold amount of commerce in a taxing state without tracking all sales. All businesses that engage in e-commerce, therefore, will have to invest in software and staffing to track sales and tax regulations in all taxing jurisdictions just to determine whether they even qualify to collect tax. Worse they will have to collect tax all along in case they do quality. In other words, the burden will necessarily apply to all businesses that conduct e-commerce in all taxing jurisdictions, regardless of size or sales or whether they meet a jurisdiction’s threshold.”
Regarding due process, Montana said, “The failure of South Dakota to show, or even litigate, whether its law meets due process concerns counsels against overruling Quill’s physical-presence rule in this case. As Quill made clear, the constraints of the Due Process Clause and the Commerce Clause are different and should be addressed separately. Due process is a bulwark for state sovereignty, and should be considered in tandem with the Commerce Clause requirements, as this Court did in Quill. To address the physical-presence aspect of the Commerce Clause in isolation, without also addressing due process, risks undercutting the very fairness that due process protects.
“Here, for many small businesses engaged in remote commerce, due process is unlikely to be met due to the lack of a minimum connection resulting from isolated online sales. In contrast, though ignored by Petitioner, the contacts found sufficient for due process in Quill were substantial,” it added.
CCIA said, “Departing from established Supreme Court precedent to allow states to engage in extraterritorial taxation would burden Internet services, and the startups and small businesses that rely on them to engage in commerce. The digital economy has thrived under a limited regulatory framework. Changing that in this case would have substantial ramifications for U.S. industry beyond taxation. Despite claims to the contrary, online tools that facilitate regulatory compliance do not fully resolve the burden on small businesses using the Internet to operate nationally that a change in U.S. tax policy would create. Departing from precedent could also have a significant international impact, and encourage protectionist policies abroad. E-commerce retailers do not live a tax-free existence, as they already collect and pay sales tax anywhere they have a physical presence, as well as use taxes in many other jurisdictions.”
CCIA added that “small businesses could spend, according to a 2013 study, as much as $80,000 to $290,000 for setup and integration costs, with annual costs of $57,500 to $260,000 for maintenance, updates, audits and service fees, to document what may be ‘only 0.5% of total state and local tax revenue’ — much of which is already being collected,” citing a study published by the True Simplification of Taxation Coalition.
“Proponents of abandoning the Quill precedent have cited fairness as a rationale for rejecting the physical presence rule. Even assuming that this is the proper yardstick, regulations are only fair if they apply to all firms equally. Yet abandoning the physical presence requirement would put online retailers in a very different position than brick-and-mortar stores, compelled to procure services or software solutions to manage tax and regulatory compliance for users in 45 states and the District of Columbia, and thousands of different tax regimes. Brick-and-mortar retail stores, on the other hand, must comply only with the taxing jurisdiction where they are located, regardless of where their customers may travel from. It is hardly self evident that fairness dictates that an online merchant serving ten customers spread across ten jurisdictions should have ten times the compliance obligations as a brick-and-mortar merchant with ten customers in one jurisdiction,” CCIA added.
In a brief filed jointly with dozens of small retailers that operate on its online platform, eBay also noted that “Congress could have, but thus far has chosen not to, set aside the Quill physical-presence requirement. And [petitioners] would discard the requirement even though Quill itself reaffirmed it: the Court there refused to overrule precedent requiring physical presence, finding that the requirement both is necessary to avoid undue burdens on interstate commerce and has engendered significant reliance interests.
“In taking a second bite at this apple, 25 years after the Court in Quill refused to overrule its physical-presence precedent, South Dakota maintains that changes in the economy have rendered the Quill rule obsolete. But that is not so: The considerations that underlie Quill apply with undiminished force today. Absent the physical-presence requirement, hundreds of thousands (and possibly millions) of independent small businesses that make online sales — and that were created, and have flourished, in reliance on Quill — would be subjected to difficult, and sometimes insuperable, compliance burdens. Overruling Quill therefore would cause substantial damage to one of the most important and vibrant segments of the national economy. It also would create many new questions about application of the judicially created rule urged by South Dakota, leading to unnerving uncertainty for businesses that operate online and, inevitably, to extensive litigation,” eBay and the small sellers using its platform argued.
In its brief, Etsy said that it is “concerned that if the Court’s long-standing precedent in Quill … were to be overturned, or if Quill were to be construed to not reach online sales, the impact on the small businesses selling on Etsy would be devastating. The typical single-person business selling craft products on Etsy to earn supplemental income lacks the substantial resources necessary to ensure compliance with the sales tax laws of potentially thousands of jurisdictions. … Survey data suggest that a significant percentage of Etsy sellers would stop selling into the interstate market if forced to learn and comply with the sales tax regimes of additional jurisdictions. That is precisely the fragmentation of the interstate market that the dormant Commerce Clause, and the holding of Quill, were intended to avoid.”
Etsy added, “South Dakota also argues that the dormant Commerce Clause should not prevent enforcement of its particular law requiring out-of-state businesses to collect sales taxes, emphasizing that it carves out businesses that do not sell much into South Dakota. But that is not truly accurate. While many out-of-state microbusinesses will not sell $100,000 of goods into a particular foreign State, it is reasonably likely that many would engage in more than 200 transactions — particularly for affordable, low-cost craft goods. And South Dakota has proposed no limiting principle that would prevent it or another State from introducing stingier exemptions in the future. Abandoning Quill’s bright-line rule on the basis that South Dakota’s particular exemptions are reasonable will lead to endless litigation over variants on the exemption theme.”
“This Court should do what it did in Quill — leave the bright-line physical-presence rule intact and allow Congress to decide whether, and how, to allow States to require out-of-state businesses to collect sales taxes,” Etsy said. —Lynn Stanton, [email protected]
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